Renminbi: Is China Pegging to the Dollar Again? (5 mins)


June 2017


Malcolm Riddell:            And you mentioned the currency as well?

Pete Sweeney:                Yeah, Kyle Bass is out there talking about his yuan, his short thesis against the Renminbi being solid. And he expects the currency to flatten, to fall again, obviously, and he's got money still in that trade. At least, he says he does. The currency has flattened out. The foreign exchange reserves have flattened out. Ordinarily, if you leave rates low while the US lifts rates, you would expect your currency to weaken vis-à-vis the other one. This seems to be a signal that the Central Bank doesn't think that's gonna happen, there's a couple reasons for that.

                            For one thing, there's the fact that the real cost of the real interest rates in the economy are rising. The second is that they seem to have gotten control of capital outflows, or capital flight or whatever you want to call it, however you want to characterize the massive amount of money that was moving out of China last year through this year. They stopped the drain on their giant FX reserves, they managed to put it back over $3 trillion. They look like they're building on that. China is adding to its treasury holdings again. So, that looks like a sign of confidence. But the sign of not quite confidence is China's also changed the way it sets the mid point daily guidance rate that it uses to kind of leash the currency some times.

                            So, that's a step back for reform.

Malcolm Riddell:            How has that changed?

Pete Sweeney:                Well, they've said they're going to apply, what's the word? In English it sounds like cyclical considerations, to moderate, or counter-cyclical considerations to moderate extreme moves in the currency. It seems silly, because the currency's been very flat for the past couple months, but part of that has been the dollar as well flattening out, but basically it means every morning the market looks at the Central Bank and the Central Bank says, "This is what we think that the guidance rate will be." During the trading day, the actual exchange rate, the spot rate can be 2% above it or 2% below it. So, the guidance rate sets the ban, and 4% total is actually a pretty wide range for any currency to be trade over on a single day, so there's plenty of room to run with. But they said they were going to be more scientific about this and stop using it as kind of putting it way higher than the market wanted it to be or way lower, and by that kind of using this 2% mark to drag the market up and down. They stopped doing that.

                                          They started using a more market-oriented approach for looking at basket of currencies, they identified the currencies, and then they also would look at the previous day's close. It became much more easier for the market to predict where the midpoint would be and this midpoint guidance rate also did kind of reflect where the market was roughly trading. They've just said, "We're gonna back off on that and maybe be more flexible to prevent volatility," but that's another way they can control it through fiat, basically, the way they used to do.

Malcolm Riddell:            Well, since they're using a basket of currencies, though, this sounds like a pretty complex process.

Pete Sweeney:                Yeah, you could, I mean, I'm not an FX wonk as such, but it was reproducible. We did have people who would sit there and calculate out what they thought, where they thought the Central Bank would set the midpoint the next day, and for a while that worked. You you could see more or less where it would end up based on market movements. But they've softened that recently. They changed the way the basket, basically a lot of people think that now China is re-pegging to the dollar and that's kind of where we've ended up.

Malcolm Riddell:            Could you go into that a little bit more?

Pete Sweeney:                Well, the fact of the matter is on the ground, the majority of the transactions are with the dollar. The dollar is the world's global currency, so pricing against a basket is a diplomat cover to a certain extent to say, "Look, we're, our currency is falling against the dollar, but we're tracking the yuan, the riggot, whatever," so it makes them kind of emphasize that they're part of a crowd, which is fair. China is far from the only country to let its currency dive. It's not the only country running a big trade surplus. You've got Germany. So, they just kind of wanted to use this in my opinion, in part to just kind of highlight, "Look, our currency is lowering and everybody in the States gets all worked up about how we're suppressing our exchange rate to promote our exports, but look at what the neighborhood is doing."

                                          But, in operational reality, everybody cares about what the Yuan, the Renminbi is doing with the Dollar, and that's the majority of transactions, so that's the exchange rate that counts. It's what Donald Trump cares about.


Pete  sweeney

Pete Sweeney

Asia Editor, Reuters Breakingviews

Asia Editor Pete Sweeney joined Reuters Breakingviews in Hong Kong in September 2016. Previously he served as Reuters' chief correspondent for China ...

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